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Overview

Charles Darwin discovered that life evolved through a process known as natural selection. In most environments, there are only enough resources to support a limited amount of life. The fight for these resources is vicious, and failure will often result in extinction. Usually the species which are able to spread their genes through reproduction and multiply in number eventually take over from those declining species. This is continuous; new species always come about due to the decline of other species. But sometimes events happen that cause extinctions on a large scale.

For example, a meteor wiped out almost all life on earth 64 million years ago. New species grew in the spaces left by the extinct ones, just as mammals took the place of dinosaurs after the meteor disaster.

Just as the natural world evolves through market selection and gene reproduction, so does the financial system. In both cases, firms adapt to new situations in order to grow and prosper. This is similar to how genes reproduce in nature.

If firms don’t adapt to the changing environment, they will not be able to survive. The financial system is constantly evolving and adapting, just like species in an ecosystem.

Big Idea #1: The value of money comes from the trust we as societies place in it, not from its intrinsic worth.

When the Spanish conquered Central and South America, they were looking for gold and silver. They thought that if they acquired more of it, they could make more coins with it. However, this led to a devaluation in its value regardless of what metal was used to create them.

The conquistadors failed to realize that money is valuable because of people’s trust in it. It doesn’t matter what the money is made of, as long as society trusts its value.

Trust is a crucial element in the value of money. We trust that the money we use will hold its value and that our central banks won’t overproduce it. We also trust banks to keep our money safe, which they trust us to pay back when we take out loans. Trust is vital for all aspects of finance, from physical currency to virtual transactions across the world.

In a society, people trust in the value of money because they believe that it’s valuable.

Money is valuable because people trust it. It has no intrinsic value.

Big Idea #2: The system of credit and debit funds the financial system through the creation of money.

Credit and debit cards are one of the most important developments in human history. They have enabled people to live easier lives, as well as make them more prosperous and open new worlds for exploration.

The earliest form of borrowing and lending was found in ancient Mesopotamia. People deposited clay tablets with their lenders, which were similar to IOU notes.

Banks are the primary creators of credit, which funds the financial system by expanding money. Banks create loans and give them to other people who deposit that money in another bank, which then repeats this process until there is a lot of money available.

Therefore, the financial system has a positive relationship between debtors and creditors. The money supply is widened with this relationship. This allows the financial system to grow and thrive because of monetary expansion.

Big Idea #3: The financial system is a combination of interconnected financial markets and institutions developed over centuries.

The financial system in the Western world was mostly developed there.

In medieval Italy, trade with the Arab world led to better systems of accounting. This brought about banks and credit, because merchants needed a way to fund their trading expeditions. Banks are crucial to the financial system today, because they provide funding for businesses in need of credit.